The credit score is actually a pretty recent invention. Back in the day, lenders just went by their gut, deciding if people were a risk or not. This often did not work out well for women or minorities, so in the 1950s, two men decided it was time for a system to be set up that would be a bit more objective. They developed a credit-scoring model based on behaviors they believed could assess risk for the lender.2
In 1958 this debuted under the name of the Fair Isaac Corporation (their names were Fair and Isaac). It came together to be known as FICO ©. This formula was tweaked over the years until it settled into something we are more familiar with in the 1980s.
What Is a Credit Score?
Your credit score is basically your rating, similar to checking the reviews of an Uber driver or an Amazon seller. If you dream one day of having those credit cards with the super rewards, like getting free flights or cash back on all spending, you must have a high credit score. A low score gets you the credit cards with sky-high interest rates and the payday loan. If you end up desperate for cash, you will be stuck with few options and have to take the best of the bad choices.
And be sure to check out Where To Get Your Credit Report for Free!
Your base FICO © credit scores range from 300 to 850. The highest I have ever seen myself was about 820, and we passed it around at work like a Beyoncé autograph.
Here is how the chart breaks down:
800 or higher: Exceptional Credit
750-799: Excellent Credit
700-749: Good Credit
640 – 699: Fair Credit
580 – 639: Poor Credit
580 and Below: Bad Credit
Dipping below 650 is usually where you start to get into trouble. Your goal should be to have a credit score above 700. This tells lenders you are low-risk and you are likely to make payments on time.
If you are a perfectionist, you can shoot for over 800, but it’s mostly for bragging rights. In my experience, mainly those over the age of 40 could break the 800 ceiling, and it took years of good credit to reach that point. I am sure there are probably exceptions, but time is a great factor in your FICO © score.
What Happens When You Don’t Have a Credit Score?
If you are young or have never had any debt, you may go to pull your report and discover you have none. The term is often referred to as a “thin file.” It just means that you don’t have enough history for them to give an informed opinion of your risk.
Do not freak out and go apply for 15 credit cards. The best thing you can do to build your credit is to have one or two small pieces of debt, use them consistently, and pay them on time. And remember if you have no intention of every borrowing money you don’t need a credit score. It’s not required.
There is another time when you may have a zero credit score. If you have paid off all your debt and don’t maintain any revolving credit (like a credit card), eventually everything will fall off your report. It will take years but it can happen. If you choose to do this, you will be able to find companies who will give you a mortgage but it’s a bit more work.
Laura M. Oliver is the author of Singles: Take Control of Your Own Financial Journey. It is available in paperback and Kindle on Amazon.